UPDATE 3-Karstadt owner Signa makes offer for Hudson's Bay's Kaufhof

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(Adds former Kaufhof CEO comment, paragraph 13)

By Greg Roumeliotis and Carl O’Donnell

Nov 1 (Reuters) - Saks Fifth Avenue owner Hudson’s Bay Co said on Wednesday it had received a bid for its German department store chain Kaufhof from Signa Holding, the Austrian property and retail group that owns Karstadt, another German retail chain.

Reuters reported earlier on Wednesday, citing sources, that Signa had made a 3 billion euro ($3.5 billion) offer for Kaufhof. Hudson’s Bay did not comment on the bid’s value, and Signa declined to comment.

Signa made its offer one week after Hudson’s Bay agreed to sell its flagship Lord & Taylor building in New York for $850 million to WeWork Cos.

The Reuters sources said that Signa expects Toronto-based Hudson’s Bay, which has been reluctant so far to engage in negotiations to sell Kaufhof, to respond to the offer by the middle of November.

Hudson’s Bay called the offer incomplete, non-binding and unsolicited, with no evidence of financing.

The sources said that in its offer letter to Hudson’s Bay, Signa stated its bid for Kaufhof would not be contingent on any third-party financing, since it already has 700 million euros in approved financing from European banks, and also has cash available from a 1 billion euro equity raise last month.

Signa has also offered to assume all of Kaufhof’s liabilities, including a 1.34 billion euro real estate loan by German bank LBBW, the sources added.

Hudson’s Bay said it plans to review the offer in due course. It added that its European business is an important element of the company’s strategy, and that it remains focused on executing its strategy and plans for the upcoming holiday season.

The sources asked not to be identified because details of the offer are confidential.

Hudson’s Bay shares ended trading on Wednesday up 9 percent at C$12.29 on the news, giving the company a market capitalization of C$2.1 billion ($1.6 billion).

Signa tried to buy Kaufhof in 2015, but Hudson’s Bay outbid it by paying 2.5 billion euros including debt for the German chain and its Belgian subsidiary. Since then, Kaufhof’s finances have deteriorated, to the point where vendors are finding it more difficult to find trade credit insurance to make shipments.

“If you look at what they are selling right now at Kaufhof, you can see that they don’t have the pulse of the German consumer,” said Lovro Mandac, who stepped down as Kaufhof’s CEO in 2014 after 20 years at the helm.

Hudson’s Bay financed the acquisition of Kaufhof by using a joint venture that acquired Kaufhof’s real estate and became its landlord. Hudson’s Bay kept a 63 percent stake in the joint venture, and sold the rest to other major investors, including Simon Property Group Inc.

This financial engineering backfired, as Kaufhof struggled to cope with the higher rents the joint venture imposed, as well as declining foot traffic in stores. Kaufhof is now trying to convince labor unions in Germany to accept steep pay cuts, a tough ask ahead of the holiday shopping season.

Hudson’s Bay said last week it would raise C$1.6 billion ($1.24 billion) through the divestiture of the Lord & Taylor building, as well as an equity investment in Hudson’s Bay by private equity firm Rhone Capital. Earlier this week, it also said a joint venture between Hudson’s Bay and RioCan Real Estate Investment Trust was exploring a sale of a store property in Toronto.

Selling Kaufhof would release Hudson’s Bay from its liabilities and provide an infusion of cash into the loss-making company at a time when retailers throughout North America are being squeezed by price competition from e-commerce retailers such as Amazon.com Inc.

LAND AND BUILDINGS ADDS TO PRESSURE

Hudson’s Bay remains under pressure from activist hedge fund Land and Buildings, which says the company’s vast real estate portfolio would deliver more value to shareholders if it was sold or used for purposes other than retail.

“Hudson’s Bay’s board of directors should, consistent with its fiduciary duties, seriously consider the reported Signa fully financed 3 billion euro offer for Hudson’s Bay’s European business, which is above the company’s purchase price and stated net asset value,” Land and Buildings CEO Jonathan Litt said in a statement.

Litt also criticized Hudson’s Bay’s deal last week with Rhone Capital, arguing that there was no reason for the company to opt for a dilutive share issuance when there appeared to be superior sources of capital available.

Privately held Signa, founded 17 years ago by property developer Rene Benko, now runs more than 125 retail locations in Northern Europe, generating annual revenue of about 3.8 billion euros, according to its website. It owns a big real estate portfolio with a gross asset value of more than 10 billion euros.

Signa bought Karstadt from the brink of bankruptcy in 2014 for the nominal consideration of just one euro from its majority owner Nicolas Berggruen, son of an international art dealer.

Signa restored Karstadt to profitability by realigning its offerings closer to the tastes of German consumers, cutting costs and making operations more efficient. Karstadt and Kaufhof are now the two largest department store operators in Germany. (Reporting by Greg Roumeliotis and Carl O’Donnell in New York; Additional reporting by Matthias Inverardi in Duesseldorf; Editing by David Gregorio, Frances Kerry, Grant McCool)